Company Law Board
Shri Navin B. Patel And Smt. Rashila ... vs Bhoomi Builders (P) Ltd., Shri Surinder ... on 29 October, 2004
Equivalent citations: [2006]129COMPCAS595(CLB), (2005)5COMPLJ273(CLB), [2005]60SCL209(CLB)
ORDER
S. Balasubramanian, Chairman
1. The petitioners, collectively claiming to hold more than 35% of the shares in M/S Bhoomi Builders Pvt. Ltd. have filed this petition under Sections 397/398 of the Companies Act, 1956 ( the Act ) alleging oppression & mismanagement in the affairs of the company and seeking for a declaration that the alleged resignation letter dated 29.1.1990 be declared as null and void and for cancellation of the allotment of shares made on different dates as also various resolutions of the Board passed after 1998 etc.
2. The facts of the case as stated by the petitioner are; The company is a family company incorporated in March, 1985. The directors of the company at the time of incorporation were the 1st petitioner, 2nd and 3st respondents. The petitioner was actively managing the affairs of the company. The company took on lease certain property in Nasik wherein it started building a Hotel in the name of "Krishna". Even though the hotel premises were still under construction, the respondents had been' leasing out shops and other commercial chambers in the ground floor of the said premises without the consent of the petitioners and these respondents were depositing the lease money and rentals into their own personal accounts and thus were defrauding the company. The 1st petitioner is the owner of certain plot of land in Nasik and with the permission of the petitioner, the company has started constructing a hotel " Sudin". The company has taken loans for construction of this hotel. However, the 2nd and 3rd respondents have failed to repay the said loan and income from the hotel is being credited into their personal account. With a view to oust the petitioner from the Board, they have forged a letter of resignation, purportedly signed by the 1st petitioner and had filed a Form 32 with the Registrar of Companies. There is no Board Resolution accepting the purported resignation of the 1st petitioner. The 1st petitioner instituted a civil suit before Civil Judge Nasik seeking inter alia relief of setting aside the audit report of the company for accounts audited up to 31.5.1989. However, the said suit was dismissed on the ground that he was no longer a director of the company. In the appeal filed by the 1st petitioner before the appellate forum, the same was dismissed with the observation that the petitioner could raise this grievance before the Company Law Board. By fabricating the Power of Attorney purportedly issued by the 1st petitioner in favour of the respondent No. 3, he had executed a sale deed on behalf of the 1st petitioner for sale of the property on which hotel "Sudin" has been constructed. The 1st petitioner has already instituted a suit seeking for declaring the said power of attorney and the sale deed as null and void. An inspection of the records of ROC indicates that the company has not filed any statutory returns with the ROC. In fact, no Board Meeting or General Meeting has been held for a long time with a view to exclude the petitioner completely from the affairs of the company and all the income of the company is being misappropriated by the respondents. From the notice received from the Sales Tax Authorities enclosing therewith the Auditors' Report of 1999, the petitioners came to know that there had been an increase in the capital, without any offer to the petitioners by which their shareholding has been reduced. No offer was given to the petitioners for additional shares and as a matter of fact there is no evidence that any approval of either the General Body or the Board was taken for issue of further shares. The respondents have also shifted the registered office to some unknown place. On the basis of these allegations, the petitioners have sought for various reliefs.
3. Learned counsel appearing for the petitioners submitted: The main complaints of the petitioner are that the 1st petitioner had been ousted from management, further shares were issued in exclusion of the petitioners by which the shareholding has come down and finally the respondents are guilty of not filing statutory documents before the ROC for a number of years. The company is a family company with the petitioners' group holding more than 33% of the entire shares in the company. When the petitioners initially filed the petition, they were not aware of further issue of shares and only when the respondents took the stand that the petitioners held less than 10% shares in the company, the petitioners sought for amendment to the petition challenging the further issue of shares and accordingly the present amended petition was filed. It may be seen from Annexure -C to the reply wherein details of the shareholding of the members of the company are given, that shares had been allotted only to the members of the respondents' group. No shares were offered to the petitioners. As a matter of fact, only after filing of the petition, the respondents have purportedly shown to have issued further shares so as to reduce the petitioners to below 10% so as to claim that the petition is not maintainable in terms of Section 399 of the Act. Therefore all the shares issued in 1988 and subsequently should be cancelled.
4. The learned counsel further submitted: With an ulterior motive and by forgery, the respondents claim that the 1st petitioner had resigned from the office of director. The alleged resignation letter dated 29.1.1990 ( Annexure P-3 ) purportedly a letter of resignation signed by the petitioner is a forged one. The petitioner never signed any letter of resignation. In the civil suit No. 1049 of 1991 filed by the petitioners, the respondents had filed an affidavit stating that the original letter of resignation given by the 1st petitioner had been filed with the Registrar of Companies along with Form No. 32. No such resignation letter is actually available on the records of the ROC. As a matter of fact, as late as on 17th July, 1992 ( Annexure P-5 ), the ROC had issued a show cause notice to the 1st petitioner in his capacity as a director regarding non filing of Balance Sheet and Profit & Loss Account. It would indicate very clearly that neither Form No. 32 purportedly filed regarding the 1st petitioner's resignation nor his resignation letter had been filed with the Registrar of Companies. Further, as late as in 1994, the bankers had filed a suit against the 1st petitioner in his capacity as a director. If the petitioner had really resigned, the respondent should have informed the bank. Therefore, only with the purpose of ousting the 1st petitioner from the management, the respondents have fabricated the alleged resignation letter. In a family company, removing one of the family members from the Board is a grave act of oppression. The company has not filed any statutory records with the ROC for a number of years and filed the same only in the year 1998 after the present petition was filed. Non filing of statutory return on time is a grave act of mismanagement.
5. Summing up his arguments, the learned counsel submitted that the respondents have been acting in a highly oppressive manner against the petitioners' group first by claiming that the 1st petitioner had resigned as a director and by reducing their shareholding to an insignificant minority. Therefore, this Bench should declare that the alleged resignation dated 29.1.1990 is null and void and the petitioner should be restored to the position of a director and all the shares allotted after 1998 should be cancelled as all the purported allotments have been made without consent, approval and knowledge of the petitioner and without any making offer to the petitioners.
6. Shri Bakhru, Advocate appearing for the respondents submitted: The petition should be thrown out as the matter of resignation of the 1st petitioner as a director is already before the civil court and the petitioners have already questioned the validity of the annual accounts for the year ended 31st March, 1989 which reflects a part of increase in the share capital. Notwithstanding the fact that this balance sheet reflects increase in share capital, the petitioners did not challenge the same in the civil suit. The main motive for filing this petition is that the petitioners failed to get any interim relief in the civil suit. As per their own averment at para 13B of the petition, the 1st petitioner had come to know of the increase in shareholding on receipt of notice from the Sales Tax Authorities wherein the Auditors' Report for 1989 had been enclosed. If it is so, then, the petitioners were aware of the increase in share capital but did not choose to challenge it for a number of years till the present petition was filed. Therefore it is wrong on the part of the petitioners to contend that they came to know of increase in capital after this petition was filed and when the respondents questioned the maintainability in respect of Section 399. Therefore this belated allegation relating to issue of further shares cannot be adjudicated. Even otherwise, it is to be noted that shares were being allotted periodically as and when funds were required as is evident from page 15 of the reply wherein the details of shares issued from time to time are indicated. Till 1989, when the disputes arose between the parties, shares had been issued nine times. This periodical increase in the share capital would indicate that shares were being issued as and when the company needed funds. Further, from the list of shareholders at Annexure-C, it can be seen that there are 56 shareholders most of whom are not connected with the family members and therefore it is wrong to say that shares had been issued only to the respondents' group. Therefore, the allegation that further shares were issued only to reduce the holding of the petitioners from 30% to less than 10% is not correct
7. The learned counsel for the respondents further submitted; As far as the directorship of the 1st petitioner is concerned, the matter is still pending before the civil court and since the civil proceeding was initiated prior in time to the filing of this petition, this matter cannot be agitated in the present proceeding. In so far as non filing of statutory returns is concerned, even though there were delays, all the required documents had already been filed with the Registrar of Companies. Since the petitioner has not been able to establish any act of oppression or mismanagement in the affairs of the company, the petition should be dismissed.
8. Learned counsel for the petitioners, in rejoinder, submitted: The petitioner was never aware of any allotment of shares after the allotment on 26.7.1986 at which time the total number of shares issued was 14050 shares out of which the petitioner held 4500 shares. The petitioner was not aware of 5000 shares issued on 24.7.1986 and 13200 on 16.1.1989. Therefore to say that petitioner was aware of all allotments made till 1989 is not correct. Thereafter the company had issued 15500 shares. Thus, presently, out of 47750 shares, the petitioner holds only 4500 shares indicating that the petitioners have been reduced to below 10% shares. Therefore, all the shares issued beyond 14050 shares should be declared as invalid and to that extent the share capital should be reduced. As far as the civil suit is concerned, the petitioners have only challenged the annual accounts for the year ended 31st March, 1989. The petitioners had not challenged in the civil suit the matter relating to the alleged resignation of the 1st petitioner. It is the respondents who had raised the issue of resignation of the petitioner in that suit, with the sole motive of non suiting the petitioners. In the suit, the petitioners have not alleged any act of oppression and mismanagement in the affairs of the company and as such the pendency of the suit need not stand in the way of this Board granting the relief sought for.
9. I have considered the pleadings and arguments of the counsel. Even though the hearing of this petition was concluded quite some time back, there had been delay in issuing this order due to the records of this case having been misplaced. It is to be noted that originally the petitioners had filed this petition in 1998 claiming that they were holding 33% shares in the company and accordingly the petition was admitted. However, in the reply to the petition, the respondents had pointed out that the petitioners were holding less than 10% shares in the company and as such sought for dismissal of the petition pursuant to Section 399. The petitioners maintained that they were not aware of any increase in the share capital since they never received any offer for shares, notice for general meetings nor they had received annual reports. Therefore, they sought for amending the petition to challenge further allotment of shares. Accordingly, they filed an amended petition on 28.5.1999.
10. The petitioners have raised three grievances. As far as further issue of shares is concerned, the petitioners have not challenged 7 allotments made from 20.4.1985 to 26.7.1986. At the time of incorporation of the company, as is seen from the Memorandum, the 1st petitioner, the 2nd and 3rd respondents were signatories to the memorandum - the 1st petitioner agreeing to subscribe 11 shares and the other two 10 shares each. This indicates that the 1st petitioner was holding 33% shares in the company. Even though, no details are available as to the number of shares allotted to each of the 3 subscribers and their group out of the allotments made up to 26.7.1986, the admitted position is that out of 14050 shares existing as on that date, the petitioners held 4500 shares working out to roughly 33% shares in the company. Therefore, even though there were allotments on 7 occasions, the percentage of holding of the petitioners had been kept in tact. Admittedly, the company is a family company and therefore any disturbance in the shareholding percentage is a grave act of oppression. Respondents have taken a stand that the petitioners were aware of the increase in share capital from the notice received from Sales Tax Authorities enclosing therewith the balance sheet as on 31st March, 1989 which reflected increase in the share capital and as such the challenge on increase in the share capital is belated. It is to be noted that the petitioners have challenged the balance sheet itself in the civil suit. Further, there have been further increases in the share capital of 15500 shares in the year 1989-90 and 1990-91. Considering the fact that the company had been in default in filing statutory returns including annual reports with the ROC, it is quite possible that the petitioners were not aware of the further increase in the share capital. Therefore, the contention of the respondents that the petitioners have challenged increase in the capital is belated cannot be sustained. Further, as per the Memorandum the share capital was to comprise of 5000 equity shares of Rs. 100/- each. There are no details as to how and when the authorized capital was increased as, for increase in the authorized capital, the approval of the general body is required. If so, notices should have been issued to the petitioners for general meetings which according to the petitioners were never received by them. Taking all these aspects into consideration and also the fact that as late as in 1986, the petitioners were holding 30% shares in the company, I am of the view that by increasing the capital of the company without offering any shares to the petitioners, the respondents have acted in a manner oppressive to the petitioners and therefore the increase in share capital after 1986. cannot be taken into consideration for considering the maintainability of the petition in terms of Section 399. In other words, the petition is maintainable in terms of that Section. Having held that the respondents had acted in a manner oppressive to the petitioners in allotting further shares without any offer to the petitioners, in the normal circumstances, all the shares allotted after 1986 will have to be declared as null and void. However, since the last allotment was made in 1991 and I find that shares had been issued not only to the respondents' group but also to a number of outsiders, I do not propose to do so. Further, there is already a lapse of 13 years from the date of last allotment. Therefore instead of canceling the allotments, I give liberty to the petitioners to subscribe for additional shares which would bring their shareholding in the company to 33%. In case the petitioners decide to subscribe to the additional shares, these additional shares should be transferred from the holdings of the 2nd and 3rd respondents group equally. In case the petitioners decide to take the shares, within two months from the date of this order, the petitioners should apply for additional shares along with consideration at par and within one month from the date of receipt of the application along with consideration, the 2nd and 3rd respondents should transfer requisite number of shares to the petitioners.
11. As far as the directorship of the 1st petitioner is concerned, since the civil court is already seized of the matter, I do not propose to deal with the same especially in view of the fact that the civil suit was instituted prior in time. In so far as late filing of statutory returns with the ROC is concerned, this allegation no longer survives since as per the records of the ROC which were called for by this Bench for scrutiny, all the returns have already been filed. The petitioners have also alleged that the income from the hotel business is being siphoned of by the respondents. Since there are no particulars other than a bald allegation, I am not dealing with the same.
12. The petition is disposed of in the above terms.